Hi guys, hi from Andrea Unger! In this post I will focus on why trading is dangerous and on how we can limit risk and make trading less dangerous thanks to algo trading.
Undoubtedly, trading seems to be very dangerous. Consider the bad pieces of news we sometimes hear about people who commit suicide because their investments or speculations turned into a disaster.
Trading Requires Knowledge
In my opinion, the point is that things get very dangerous when we don’t know what we are doing. Unfortunately, many people start trading knowing too little about both the instruments they trade and what happens when the markets move.
They don’t even know the structure of instruments. Stocks can be quite easy to understand, but people also trade futures, options and so one and so forth, so all these things increase the danger of doing something without knowing what is actually going on.
As a first thing, you must study and understand what trading is all about and how the underlying markets move.
You need to understand different things. If you are going to drive a car, you first need to understand how the car works, how to accelerate and brake, and so on. Then, you have to understand how to move in the streets and be careful about all the people around you.
You probably don’t consider driving a dangerous activity, as you do it every day. However, if you’re drunk, or in bad weather conditions, or you run too fast, then you might consider it dangerous.
So, you see that when you do something that you don’t know and over which you don’t have any control, you are in danger. From this point of view, trading is very dangerous.
Is Trading Less Dangerous for Experts?
So, you might be wondering whether being an expert could help in avoiding dangers in trading. The answer is yes, but keeping in mind that experts, too, can be in danger.
In fact, it often happens that experts underestimate certain events that might occur in the markets. This is something I do myself, so I am not telling you that most people are wrong, and that I’m the only one who knows the truth. This is simply something that, as an expert, I do, like many traders.
We sometimes read about certain issues that occur to people who did something that is considered dangerous. These people must have clearly underestimated some little detail or possible event that, then, actually happened.
This also occurs in trading. Due to their great experience, sometimes experts are not careful enough and run the risk of neglecting some things that might be important.
You Need a Plan
If this happens, you might run into serious trouble, because even though such unexpected events won’t necessarily wipe your account out, they’ll certainly cause you some problems. In order to avoid such occurrences, you need to take everything into consideration, which means you have to devise proper plans.
People don’t usually prepare plans, and even when they do, they don’t take into proper consideration the prospect that what they’re doing could go wrong. So, if they buy one stock because they think it will go up, they don’t consider what would happen if it went down.
They don’t put it in the “if… then… else” scenario, just because they are sure that that thing will never happen. Perhaps, they watch movies in which some incredible wolf of Wall Street invests in a certain way, I don’t know because of what reason, and think that they can do the same. Trading doesn’t work like that!
The same way you need to line up all the bricks in order to build a wall, if you want to devise a well-thought trading plan, you need to take everything into consideration and stick to your plan.
Algo Trading May Help Reduce Risk
This is the reason why I am a supporter of algo trading. Algo trading helps us enormously, in that it allows us to make decisions and put everything in place using numbers, so we can devise our plans from A to Z following numerical evidence.
Obviously, things can still go wrong, because there’ll always be an unexpected event that you did not consider, a bomb on your cloud or anything else.
Whatever should happen, algo trading allows you to limit all risks to the minimum, enabling you to put all your knowledge and your plans into action, before being under stress due to the markets.
This works best when everything is automated, as I do. However, unfortunately there are some strategies on options and other underlyings that might not be easily automated. Therefore, we have to take action manually. In such cases, you need to devise your plan but also to be there and do things when you are supposed to do them.
Obviously, when you are supposed to do something and instead of being ready, you go and have a cup of coffee, you are still in trouble, but this is a discipline issue, so you must be disciplined as a machine would be, if you put all the instruction inside.
Trading Is Less Dangerous If Done Properly
Algo trading is a good solution that allows you to limit risk in trading and make it less dangerous, making it look normal as driving a car can be.
To conclude, I don’t think trading is dangerous, but I think it could be dangerous. So, I think you need to properly evaluate what you’re doing. In order to do this, you need to thoroughly study what you do, where you do it and how you do it.
Put everything together in a plan, put it in a machine and stick to the plan.
By doing so, you’ll limit risk and make trading as dangerous as anything else in life. There can be always some unexpected events in life, and this is the only certainty we have, but thanks to algo trading and numbers we can limit risk and turn trading into something that you wouldn’t consider dangerous anymore.
That’s it guys, I hope this post helped.
Please write down what mistakes you did and why you think trading can be dangerous.
Ciao from Andrea Unger, see you next time!